Class notes ACCT2001 (ACCT2001)

Accounting

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Subject - ACCT 2001(002)
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Accounting is the information system that :
-​ Measures business activities
-​ Processes the information into reports
-​ Communicates the results to decision makers

Generally Accepted Accounting Principles
●​ Accounting guidelines are called Generally Accepted Accounting Principles (GAAP)
[type of accounting everyone uses]
○​ Overseen by the (privately funded) Financial Accounting Standards Board
(FASB)
●​ Useful accounting information must :
○​ Be relevant, allowing users to make a decision
○​ Have faithful representation by being complete, neutral, and free from error

Economic Entity Assumption
●​ An organization that stands apart as a separate economic unit follows the economic
entity assumption
●​ An economic entity can be a :
○​ Sole proprietorship
○​ Partnership - 2+ people doing business for profit
○​ Corporation - usually many owners and pays tax as the entity
○​ Limited-liability company(LLC) -

Other principles
●​ Cost Principle:
○​ Acquired Assets and Services should be recorded at their actual cost (historical
cost)
●​ Going Concern Assumption:
○​ Assumes the entity will remain open for the foreseeable future, or long enough
that its resources will be absorbed by the entity
●​ Monetary Unit Assumption
○​ Financial statement items measured by monetary unit (the Dollar in the U.S.)

The accounting equation is the basic tool of accounting, measuring the resources of the
business and the claims to those resources
Assets = liabilities + equity (on first test)

,Asset(10K in cash) = Liabilities(0) + Equity (10k)
Asset(10k) = Liabilities(1k) + Equity(9k)

Assets(own)
An asset is an economic resource that is expected to benefit the business in the future
●​ Examples
○​ Cash
○​ Merchandise inventory - company will se for resale; grocery store - stuff on the
shelves
○​ Furniture - something that is large that the company can use for multiple periods
at one point of time
○​ Land

Liabilities (owe)
●​ Liabilities are debts that are owed to creditors/creditor claims on business assets
●​ Many liabilities have the word payable in their titles
●​ Examples
○​ Accounts payable (AP) - something that is owed at a point of time in the future
○​ Notes payable (NP) - taking out a loan
○​ Salaries payable (SP) - the time difference between when you work and when
you get your paycheck

Equity
●​ The owner’s claims to the assets of the business are called equity
●​ Increases in equity result from owner contributions and revenues
○​ Owner contributions are referred to as owners capital
○​ Revenues are earnings that result from delivering goods or services to customers
●​ Equity decreases with expenses and owner withdrawals
○​ Expenses are the costs of selling goods or services
○​ Owner's withdrawals are payments of equity (usually of cash) to the owner
●​ Examples
○​ (+)Owners contributions - infusion of cash into a business that the business can
use for some other purpose
○​ (-)Withdrawals/distributions - the owners have less opportunity to get those
assets
○​ (+)Net income - business operates at a profit (revenues > expenses)
○​ (-)Net less (revenues < expenses)
○​ (+)revenues
○​ (-) expenses
The balance sheets reports on the assets, liabilities, and owner’s equity of the business as of a
specific date
-​ Write it on paper(slide 12)

Accounts receivable(assets)

, ●​ Receivables are future receipts of cash
○​ Cash will be received, is future benefit
Accounts payable (liabilities)
●​ Payables are future payments of cash
○​ Cash is owed; liability

Transaction - is any event that affects the financial position of the business and can be
measured with faithful representation
●​ Examples ; buying a computer for the office for $2,000 cash

Transaction Analysis
●​ Step 1
○​ Identify the accounts and account types
○​ Always affects two accounts
●​ Step 2
○​ Identify what happens to each account
○​ Does the account increase or decrease
●​ Step 3
○​ Balance the accounting equation (A=L+E)
(add example)
Step 1 - cash?
Step 2 - increase or decrease?

Accrual Basis Accounting records the effects of each transaction as if occurs
-​ Revenues recorded when earned
-​ Services provided; goods provided
-​ Expenses recorded when incurred
-​ When used
-​ Cash receipts or payments do not affects income

Financial Statements
1.​ Income statement - provides information about profitability for a particular period for the
company (Revenues - Expenses = Net Income or Net Loss)
2.​ Statement of owner’s equity - shows the changes in the owner’s capital account for a
particular period (Owner, Capital Beginning, +owner contribution ; +net income or -net
loss ; -owner withdrawal = owner, capital, ending)
3.​ Balance sheet - provides valuable information to financial statement users about
economic resources the company has(assets) as well as debts the company
owes(liabilities). Allows decision makers to determine their opinion about the financial
position of the company (assets = liabilities + owner’s equity)
4.​ Statement of cash flows - reports on a business’s cash receipts and cash payments for a
period of time (cash flows from operating activities; cash flows from investing activities;
cash flows from financing activities)
If services are performed or received - service revenue